Going Platinum

AS DRIVERS IN EUROPE turn to diesel engines for more efficient motoring, and governments push for tighter global emission standards, platinum is along for the ride.

In 2002, the spot platinum price climbed more than 20%, to about $600 a troy ounce, a 13-year high. Much of that gain is attributable to a marked increase in demand for the metal in catalytic converters -- important parts of cars' anti-pollution systems. Demand is expected to grow in proportion to supply, holding prices near current levels.

"In short, the platinum market is in chronic structural shortage, which Western producers look poorly positioned to relieve until at least 2005," says Steve Sheperd, analyst at J.P. Morgan in Johannesburg. "After perhaps easing slightly from recent levels early next year, prices may well spend most of 2003-2004 above $600."

Refiners Johnson Matthey estimate diesel-vehicle sales rose 7% in western Europe in 2002, accounting for almost 40% of total passenger-vehicle sales.

Global demand from the auto sector for platinum remained strong in 2002 at about 6.37 million ounces, according to Matthey. But in the short term, car makers are likely to rely on their own inventories of the metal, which may limit price gains.

But Stephen Briggs, London-based metals analyst at Societe Generale, says auto-maker stockpiles are close to exhaustion and platinum demand from the sector in 2003 could soar by 13%. Yet there is a risk, he says, that soaring platinum prices could encourage auto makers to look at switching back to palladium, which was widely used in catalysts before its price rocketed to more than $1,000 per troy ounce in late 2000. Now, that metal is about $250. But this process may not be as clear cut as it first seems.

"Although car makers are technically better placed than in the past to switch, many may take some persuading and may hold off for a while," Briggs says. Manufacturers have become wary that any immediate substitution could result in a similar price reversal in favor of palladium within only a couple of years, setting in motion a cyclical price swing.

DJ-AIG Commodity Indexes

DJ-AIG Indexes

1/3

12/27

YTD

Commodity Futures

114.733

112.661

29%

Total Return

194.995

191.430

31%

Energy

211.239

204.419

64%

Petroleum

186.834

184.230

60%

Livestock

66.693

65.762

-11%

Grains

52.090

51.933

17%

Industrial Metals

60.498

60.127

3%

Precious Metals

62.215

61.396

18%

Softs

76.513

75.613

21%

Dow Jones/AIG International

Offering more sustainable support to the platinum price is the jewelry market, with players expecting a sharp jump in demand led primarily by China, where fashions have favored the metal during the past few years. Some analysts note here, too, that Chinese demand is price-sensitive. Johnson Matthey also points to the risk of waning jewelry markets in Europe, Japan and North America in response to weakness in the global economy. Ross Norman, analyst at trading and research firm TheBullionDesk.com, says that demand from China has already eased and won't reappear in size until the spot platinum price eases back to $570.

Likewise, Sheperd of J.P. Morgan warns that Chinese jewelry fabricators haven't historically been buyers at the $600 level. Those fabricators account for about 25% of global jewelry demand. He sees that buying reappearing at $550.

Despite these downside risks, Shepherd's colleague Briggs believes the positive trend for platinum demand will remain intact and expects 7% growth in the sector as a whole in 2003.

The supply picture is more clearly bullish. Briggs notes that although major producer Russia may sell another 100,000 ounces in 2002, the market still could be in a deficit of 375,000 tons.

Sheperd also expects mine expansion to be slow, especially in South Africa, the world's top producer. There, bureaucracy could continue to delay the granting of prospecting and mining licenses, and complex joint ventures may slow project development progress, he says.

Supply from South Africa also may suffer from a lack of skilled staff, given that mining, engineering and financial skills and services are becoming stretched, while delivery of black empowerment funding remains at issue despite the recent mining charter, Sheperd adds. The charter, drawn up by the South African government, calls for 26% of all mines to be owned by blacks within 10 years.

Key Commodity Indexes

CRB Group Indexes

1/3

Prev. Wk

Yr. Ago

CRB Futures

240.19

237.29

191.17

Industrials

182.74

177.81

145.04

Grain/Oils

190.09

191.04

162.26

Livestock

257.07

253.86

246.51

Energy

336.47

333.85

199.66

Precious Metals

291.37

286.41

244.79

Barron's/Bridge-Telerate

Most analysts say platinum could continue climbing to $625 in 2003, with support at about $550.

"It's definitely got a lot going for it in the future, but I don't think we can get carried away with it just yet," says a London-based dealer. "There are too many people waiting to sell platinum over $600 to justify much of a rally above that."

Crude-oil futures swung violently as Venezuela's absence from the market began to cut inventories, leaving traders to fret about even tighter supplies if the U.S. wages war in Iraq. February crude ended the week at $33.08 a barrel.

David Elliott is a reporter with OsterDowJones Commodity News in London.

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